KUALA LUMPUR: The planned acquisition of UEM Group by MMC Corp Bhd is seen as a move for the highways under the group but there are other synergies that may be extracted after the takeover.
Sources with knowledge of the proposal say concerns over the indebtedness of MMC are overblown should MMC secure PLUS Expressways Bhd as the shared benefits from other businesses in UEM would offset the reduction in profit from the capping of toll rates.
“There is great opportunity for the two entities to combine their expertise and further strengthen their position in the various sectors,” said the source. “These synergies could invariably unlock benefits in terms of scale and efficiency, which could translate into higher margins and returns.”
In some ways, UEM and MMC share a number of similarities.
UEM has built highways and bridges while MMC was part of the consortium that built the SMART tunnel and is currently involved in the electrified double-tracking railway project.
In terms of land, MMC has almost 5,000 acres in Johor, which ranks it as one of the biggest private land owners in the country. With UEM Land, too, a major player in the property development business in Johor, and with relationship between Malaysia and Singapore warming up, the combination of both companies’ assets would be positive and add value to MMC.
“This can go both ways as MMC may have areas of strength from which UEM may tap into, which ultimately will enhance their value to their shareholders,” said the source.
The source said that should the proposal of no toll increases and no extension of the concession period materialise, it would benefit both the Government and the people.
“This would mean the rakyat would not bear the burden of increased costs and this also relieves the Government from the burden of having to manage this strategic asset and entrust the private sector to carry out this responsibility efficiently within the set parameters,” the source added.
Banking sources said the fear many had from the capping of toll rates would mean increased risks for any concessionaire.
With the proposed minimum wage set to be implemented in the near future, and also a proposed high-speed rail link that not only goes to Singapore but eventually up north in the peninsula, that should lead to cost rises and even a decline in traffic flow on the highways.
Should traffic growth on the highways drops, then revenue will shrink and the debt taken to fund the acquisition of UEM becomes shaky.
“What guarantee is there that this would not happen?” the banking source asked, adding that bonds would then have to be restructured and bondholders and stakeholders stand to lose a lot of money.
Sources with knowledge of the proposal said like any business initiative, the management would have to ensure that all revenues were maximised and costs minimised.
“In a situation where revenue from the toll concession would be capped for the remainder of the term, a careful assessment of the areas within the group must be made to identify where revenue may be enhanced and costs reduced without compromising service levels,” said the source.
The thought is that MMC may implement both revenue-enhancing and cost-saving initiatives in order to mitigate the reduction in profit from the cap on toll rate.
“This can be better accomplished with the synergies MMC would achieve with the takeover,” said the source, which added that MMC’s proposal would presumably incorporate the relevant capex required to ensure that the interests of road users were not compromised.
The proposed acquisition of UEM would be funded via a combination of debt and equity and the believe is that the debt-equity ratio is expected to be in line with what is required to meet the returns by both the lenders and the equity investors.
“As there is sufficient liquidity in the domestic loan and bond market, support for such acquisition funding would be accessible,” said the source.
Whether MMC can afford to buy over UEM considering the reported RM15.6bil purchase price has been flagged as a concern given the leverage MMC is carrying but the source said the gearing of the group was 2.4 times based on borrowings and debt and much of that was attributed to Malakoff Corp Bhd.
Malakoff had approximately RM14bil of debt as at June 30, 2010 and those debts were mainly project financing and “ring-fenced”.
“Malakoff’s cashflow is reported to be sufficient to service its debt obligations in a timely manner, thus should not be a cause for undue worry to investors,” said the source.
MMC on its own has a gearing of less than 0.8 times.
MMC’s preliminary bid for UEM has been submitted to the Government and institutional fund giants EPF and PNB have not yet been approached to be its partner in the takeover of UEM.
The source said that if the Employees Provident Fund and Permodalan Nasional Bhd are approached by MMC to be their partners in the takeover of UEM, it’s likely that those bodies will evaluate the merits of the proposal and make the appropriate investment decision or recommendation.
“If MMC’s proposal can provide a reasonable yield to interested investors on a recurring basis, there is no reason why it should not attract the required participation,” said the source.
Although there are complementary businesses between MMC and UEM where synergies may be extracted, a divestment of non-core business post-acquisition could very well take place.
“Therefore, it would not be unreasonable to assume that MMC would undertake a rebalancing of its portfolio post-acquisition and divest non-core businesses or realign certain businesses as part of its strategy,” said the source.
To answer concerns that the bid might undervalue the value of UEM, the source said the RM15.6bil acquisition price was also not set in stone.
“The proposal is still at the preliminary stage and it is likely that MMC will need to review the consideration price post-due diligence,” said the source.
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